Franchise Owners File Lawsuit to Block Seattle's $15 Minimum Wage

June 11, 2014

Today the International Franchise Association filed a lawsuit asking a court to block implementation of Seattle’s newly passed $15 minimum wage law. The law received unanimous support from the Seattle City Council and is scheduled to go into effect April 1, 2015.

The lawsuit argues the new law illegally and unfairly discriminates against the city’s 600 franchise owners by treating them as large businesses, regardless of how many workers the franchise owner employs. In a press release today, the group says Seattle’s new wage law “improperly treats them [franchise owners] not as the small, locally-owned businesses they are, but as large, national companies.” 

Under the new law, franchise owners whose national brand employs more than 500 workers in the U.S. are considered large businesses, and as such have a much shorter phase-in of the new $15 wage. Large businesses have just three to five years to acclimate to the new wage, while small businesses have up to seven years. So a franchise business owner who employs 10 workers will be treated the same as a business employing 500 people; that franchise owner with 10 employees will be required to pay their workers $15 per hour years before their non-franchised competitor of the same size.

Seattle Mayor Ed Murray and the City Council contend franchisees are not small business owners because they receive support from their brand’s national companies. They say franchisees benefit from an established business model, large-scale marketing and advertising, menu development and purchasing power from their brand’s national company.  

The Seattle Times points out franchise operations are locally operated and independently owned businesses that are not run by their national headquarters:

“…contrary to the rhetoric from the $15 wage movement, these businesses are not arms of corporations. Franchises have their own tax ID numbers and payroll — they are independent business units separate from the franchiser. Typical agreements offer franchises a brand, a business model, some marketing and bulk buying power. In exchange, franchises pay about 4 to 7 percent of their gross profits back to the franchiser.”

Socialist Council member Kshama Sawant declared the new law is fair because all franchise owners are rich and can afford to pay every worker $15 per hour:

“In order to be a franchisee, you need to be very, very wealthy.”

While Sawant lumps the CEO of McDonald’s and the owner of one McDonald’s franchise in the same corporate fat cat category, the reality is many franchise owners are mom and pops who risk their life savings to become a small business owner. Responding to Sawant's absurdly generalized statement about franchise owners, Subway sandwich shop owner Matt Hollek quipped:

“I guess I’m a rich guy.  Nobody told me.” 

Hollek is a former aerospace mechanic who owns one store in Seattle that employs eight workers. He leveraged all of his home’s equity to build his own small business and like any business owner he has had successes and defeats. While Hollek owns a total of seven Subway locations today, at one point he says he was $360,000 in debt and had to sell two of his stores to stay afloat. As Hollek puts it:

“I’m not a wealthy franchiser.  I’m not Subway.  I pay them for the use of the name. That’s it.”

Council members and other $15 minimum wage supporters justify tagging all franchise owners as big businesses by conjuring the vilified image of corporate fast food franchise giants like McDonald’s and Burger King. But the truth is that franchises cover dozens of businesses ranging from tax preparation services, sign-making stores and senior-care facilities. And like Matt Hollek, many of the franchisees of the fast food giants are small operators who are effectively on their own when it comes to running their business.

They may receive some built-in support in exchange for the franchise fees and royalties they pay, but the corporate franchisors do not pay the franchisees’ labor costs, so the burden of the mandated $15 wage will fall entirely on the franchise owner.